Reverse Breakup Fee

What is a reverse termination fee?

A reverse termination fee is cash the buyer pays the target if the buyer fails to close a signed acquisition, usually because antitrust regulators block it. It is the mirror image of the ordinary breakup fee, which the target pays the buyer for walking away, and it is often the target's only remedy.

Reverse termination fee, reverse breakup fee, or just Termination Fee?

The three names describe the same money moving in the same direction. "Reverse breakup fee" and "reverse termination fee" are market shorthand; the merger agreement itself may use any label. Microsoft's agreement to buy Activision Blizzard defines it as the "Parent Termination Fee," because Microsoft was Parent. Adobe's agreement to buy Figma simply called it the "Termination Fee" and made only Adobe liable to pay it. When you read an agreement, ignore the jargon and find the sentence that says which party pays.

How the fee is triggered

A reverse fee is not a general penalty for bad behavior. It is triggered by a specific list of termination rights, and the list is short.

The dominant trigger is regulatory failure. In the Microsoft-Activision agreement, Microsoft owed the fee if the agreement was terminated either because of an injunction arising from antitrust laws, or on hitting the outside date with every closing condition satisfied except the antitrust ones, provided Activision was not itself in material breach. Adobe's agreement to buy Figma used the same architecture: Adobe owed the fee on a termination tied to a legal restraint that was, or was in respect of, an antitrust law, where all other closing conditions had been satisfied or waived.

Three structural features follow from that drafting.

• The fee is a risk transfer, not a damages estimate. It prices the chance that a government blocks a deal the two companies both still want.
• It is usually the only thing the target gets. The Adobe and Figma mutual termination agreement says payment of the fee "shall be the Company's and its Affiliates' sole and exclusive remedy," and Figma waived its other rights and recourse. The merger agreement itself carried the same exclusivity, subject to Figma's separate right to specific performance.
• It can be tiered by time, because regulatory delay is itself the harm. Microsoft's fee rose from $2 billion to $2.5 billion to $3 billion depending on when notice of termination was given.

Alongside the fee, sophisticated targets negotiate covenants about effort: what the buyer must do to win clearance, whether it must litigate, and whether it must divest assets. A large reverse fee with weak effort covenants is a worse deal for the target than a smaller fee with a hell-or-high-water obligation, because the fee only pays out after the deal is already dead.

A worked example from the filings

Adobe agreed on September 15, 2022 to acquire Figma for approximately $20 billion in cash and stock, and the merger agreement obliged Adobe to pay Figma a Termination Fee of $1,000,000,000 if antitrust restraints killed the deal while every other condition was met. On December 17, 2023 the two companies signed a mutual termination agreement under which Adobe was to pay Figma that $1,000,000,000 in cash within three business days.

Run the arithmetic on that fee as a share of announced deal value. One billion divided by twenty billion is 0.05, so the reverse fee was 5.0 percent of the roughly $20 billion headline price. Neither filing says how that ratio compares with market practice, so read it as the price these two parties put on the regulatory risk rather than as a benchmark.

Now compare the two sides of the Microsoft-Activision agreement, which sets both fees in the same document.

• Company Termination Fee, payable by Activision Blizzard to Microsoft: $2,270,100,000.
• Parent Termination Fee, payable by Microsoft to Activision Blizzard: $2,000,000,000 if notice came before January 18, 2023; $2,500,000,000 if between January 18, 2023 and April 18, 2023; $3,000,000,000 thereafter.

The ratio of the two fees changes as the calendar moves. At signing, the buyer's exposure of $2,000,000,000 was smaller than the target's $2,270,100,000, a ratio of about 0.88 to 1. Past April 18, 2023, the buyer's exposure of $3,000,000,000 exceeded the target's by $729,900,000, a ratio of about 1.32 to 1. The escalation was the mechanism that kept Microsoft motivated through a long clearance fight rather than letting the outside date quietly solve its problem. Activision Blizzard reported that the merger completed on October 13, 2023, so no reverse fee was ever paid.

Both agreements also cap repetition. Microsoft's agreement states that in no event will Parent be required to pay the Parent Termination Fee on more than one occasion.

Where it shows up in documents

Reverse fees live in the termination article of the merger agreement, not in the price or consideration sections. In the Microsoft-Activision agreement the relevant text sits in Section 8.3, "Fees and Expenses," with the Parent Termination Fee in Section 8.3(c) and the Company Termination Fee in Section 8.3(b). Adobe's agreement with Figma puts its Termination Fee in Section 8.2(b), inside a section titled "Effect of Termination; Termination Fee."

Read four things when you get there.

• Which terminations trigger it. Cross-reference every subsection listed back to the termination provisions themselves.
• The condition that the payee not be in material breach. Microsoft's clause adds that any breach by Activision that was the primary cause of a failed condition counts as material.
• Payment mechanics and enforcement. Microsoft's agreement gives two business days for some triggers and concurrent payment for others, and shifts enforcement costs plus interest to a party that fails to pay.
• Whether the fee is the exclusive remedy, and whether fraud or willful breach is carved out of that exclusivity. Adobe's merger agreement preserved liability for fraud or willful breach even after termination.

The related 8-K is the fastest route in. Activision Blizzard's 8-K summarized the entire tiered structure in a single sentence, which is often enough to decide whether the full agreement is worth reading.

Common mistakes

Treating the fee as the target's compensation for lost value. It is a negotiated number, not an estimate of harm. Figma's mutual termination agreement recites that the payment covers lost profits, market impact and other setbacks, and then extinguishes every other claim. A target that expects to litigate for more after cashing the check has usually signed that right away.

Assuming a reverse fee exists. Plenty of agreements have an ordinary breakup fee and no reverse fee at all, which leaves the target with specific performance or nothing.

Confusing it with a financing failure fee. Some agreements carry a separate, often smaller fee for a buyer whose debt financing collapses, and a larger one for antitrust failure. Check whether one number covers both or whether there are two.

Reading the headline percentage without the trigger list. A 6 percent reverse fee that only pays on a court injunction is weaker protection than a 3 percent fee that also pays on an outside-date termination with conditions otherwise met.

How it relates to adjacent terms

A breakup fee runs the other way: the target pays the buyer, most often when the target's board accepts a superior proposal. Activision's $2,270,100,000 Company Termination Fee is that fee, and seeing both in one agreement is the clearest way to understand the pair.

Closing conditions determine whether a reverse fee ever becomes payable, because almost every reverse-fee trigger is written as "all conditions satisfied except these." If you cannot map the condition list, you cannot price the fee.

A material adverse change clause is the buyer's other exit, and it competes with the fee. A buyer that can walk on a MAC pays nothing; a buyer whose only exit is antitrust failure pays the fee. Which door is open is the substance of the negotiation, and the fee is only the price on one of them.

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